Indian central bank holds interest rates

A security guard stands in the lobby of the Reserve Bank of India (RBI) headquarters in Mumbai [Reuters]

India’s Reserve Bank (RBI) has in a surprise move decided to hold interest rates despite a sharp increase in inflation.

On Wednesday, revealing India’s mid-quarter monetary policy review, bank governor Raghuram Rajan was quoted as saying that though currently inflation is high in the country “given the wide bands of uncertainty surrounding the short term path of inflation from its high current levels and given the weak state of the economy, there is merit in waiting for more data to reduce uncertainty".

Giving reasons for not hiking interest rates, the central bank governor said he expected easing of retail prices in the short run. He also said he was concerned about the weakness in the Indian economy.

Market analysts had predicted that India’s central bank would lift its repo rate by 25 basis points to curtail inflation. Instead, the bank decided to keep the country's main lending rate at 7.75 percent.

Retail inflation soared to a nine-month high of 11.24 per cent in November, while the wholesale price index rocketed to a 14-month high of 7.52 per cent the same month.

According to the RBI, headline inflation, both retail and wholesale, had increased mainly due to rising food prices.